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Project Number: 49450-015 November 2019

Pacific Renewable Energy Investment Facility : Increasing Access to Renewable Energy Project

This document is being disclosed to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 17 September 2019) Currency units – Australian dollar/s (A$) A$1.00 = $0.69 $1.00 = A$1.46

ABBREVIATIONS

ADB – Asian Development Bank BESS – battery energy storage system CO2e – carbon dioxide equivalent DMC – developing member country GDP – gross domestic product kW – kilowatt kWp – kilowatt-peak MW – megawatt MWh – megawatt-hour PAM – project administration manual MOF – Ministry of Finance MTET – Ministry of Transport, Energy and Tourism TA – technical assistance TEC – Tuvalu Electricity Corporation

NOTE

In this report, "$" refers to United States dollars, unless otherwise stated.

Vice-President Ahmed M. Saeed, Operations Group 2 Director General Carmela D. Locsin, Pacific Department (PARD) Director Olly Norojono, Energy Division, PARD

Team leader Cinderella Tiangco, Senior Energy Specialist, PARD Team members Tahmeen Ahmad, Financial Management Specialist, Procurement, Portfolio and Financial Management Department (PPFD) Cynthia Ambe, Operations Assistant, PARD Ninebeth Carandang, Senior Social Development Specialist, PARD Taniela Faletau, Safeguards Specialist, PARD Jane Fantilanan, Associate Project Analyst, PARD Syed Hussain Haider, Senior Infrastructure Specialist, PARD Mairi MacRae, Social Development Specialist (Gender and Development), PARD Kevin Moore, Senior Procurement Specialist, PPFD Sivou Beatrice Olsson, Country Coordination Officer, Pacific Subregional Office, PARD Douglas Perkins, Principal Counsel, Office of the General Counsel Eun Young So, Energy Specialist, PARD Jean Williams, Senior Environment Specialist, PARD Peer reviewer Susumu Yoneoka, Energy Specialist (Smart Grids), Sustainable Development and Climate Change Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE

MAP

I. BACKGROUND 1

II. THE PROJECT 1 A. Rationale 1 B. Impacts and Outcome 3 C. Outputs 3 D. Summary Cost Estimates and Financing Plan 4 E. Implementation Arrangements 5

III. DUE DILIGENCE 5 A. Technical 5 B. Economic and Financial 6 C. Governance 7 D. Poverty, Social, and Gender 8 E. Safeguards 8 F. Summary of Risk Assessment and Risk Management Plan 9

IV. ASSURANCES 10

V. THE PRESIDENT’S DECISION 10

APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 49450-015 Project Name Increasing Access to Renewable Energy Department/Division PARD/PAEN Project Country Tuvalu Executing Agency Ministry of Finance Borrower Government of Tuvalu (formerly Ministry of Finance and Economic Development) Country Economic https://www.adb.org/Documents/LinkedDocs/ Indicators ?id=49450-015-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/ ?id=49450-015-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million) Energy Renewable energy generation - solar 6.00 Total 6.00 3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities CO2 reduction (tons per annum) 844 Accelerating progress in gender equality Climate Change impact on the Medium Tackling climate change, building climate and disaster resilience, and Project enhancing environmental sustainability Making cities more livable ADB Financing Strengthening governance and institutional capacity Adaptation ($ million) 0.20 Mitigation ($ million) 5.80 Sustainable Development Goals Gender Equity and Mainstreaming SDG 1.4, 1.5 Effective gender mainstreaming (EGM) SDG 5.5 SDG 7.2 Poverty Targeting SDG 10.3 Geographic Targeting SDG 13.a

4. Risk Categorization: Low . 5. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C

. 6. Financing Modality and Sources Amount ($ million) ADB 6.00 Sovereign Project grant: Asian Development Fund 6.00 Cofinancing 0.00 None 0.00 Counterpart 0.48 Government 0.48 Total 6.48

Currency of ADB Financing: US Dollar

Source: Asian Development Bank This document must only be generated in eOps. 04102019181907111697 Generated Date: 25-Oct-2019 13:46:52 PM ADB'S DEVELOPING MEMBER COUNTRIES IN THE PACIFIC TUVALU NORTHERN INCREASING ACCESS TO MARIANA HAWAII FOGAFGUAM ALE MARSHALL ISLANDS N O R T H P A C I F I C O C E A N RENEWABLE ENERGY PROJECT Fualefeke FEDERATED STATES REPUBLIC OF OF MICRONESIA PALAU Mulitefala NAURU Tegako I N D O N E S I A PAPUA K I R I B A T I NEW GUINEAFualopa Matagi SOLOMON TUVALU TIMOR-LESTE ISLANDS VANUAL TU a g o o n COOK ISLANDS FRENCH NORTHERN ISLANDS FUNAFUTINIUE NEW A U S T R A L I A CALEDONIA Fatato S O U T H P A C I F I C O PCapaelise E A N NANUMAGA Fuakea Falefatu Mateika N E W Z E A L A N D Lua Motu Tuamotu Tegasu Avalau Telele Meang Motuloa Tokinevai NUI L a g o o n

Fenuatapu Pongalei

Fenuatapu

CENTRAL ISLANDS Fuunaota Lafaga Fale Motulalo S O U T H P A C I F I C O C E A N FOGAFALE Fualefeke Tegako

Fuafatu FUNAFUTI NUKUFETAU Fuunaota Funafala

Sakalua Lafaga Tumuiloto L a g o o n Fagaua Niuoku

Fale NUKULAELAE Tumuiloto Motulalo L a g o o n

Fangaua Niuoku SOUTHERN ISLANDS

National Capital Teafatule

Airstrip Fetuatasi Road Reef/Atoll Boundaries are not necessarily authoritative. N

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this 0 2.5 5 map do not imply, on the part of the Asian Development Bank, any judgment on the Inset legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. 0 20 40 60 80 Main

Kilometers (km)

19TUV ABV

I. BACKGROUND

1. On 22 June 2017, the Board of Directors of the Asian Development Bank (ADB) approved 1 the Pacific Renewable Energy Investment Facility.0F The facility will finance renewable energy 2 projects in the 11 smallest Pacific developing member countries (DMCs).1F It has an overall estimated cost of $750 million, including ADB financing of up to $200 million. Upon approval, the Board delegated authority to the President to approve loans and/or grants to each targeted country for qualifying projects.

2. The facility will finance a grant to Tuvalu for the Increasing Access to Renewable Energy Project. The project will help the Government of Tuvalu expand access to modern energy services; improve the quality, reliability, and climate resilience of service; reduce reliance on fossil fuels for power generation; and reduce the cost of generation. The project will decrease the cost of supply by partially replacing diesel power with solar power.

II. THE PROJECT

A. Rationale

3. Country background. Tuvalu is a Polynesian country in the Pacific region, about 1,200 kilometers (km) north of Fiji. The country has a total land area of 26 square km and an exclusive economic zone of 900,000 square km. It is composed of nine and islands, of which Funafuti is the most populated. It is extremely remote from all markets and most resources. Like many other small Pacific islands, Tuvalu’s electricity production relies heavily on imported diesel fuel, transported over long distances across the ocean and subject to climate change–related supply disruptions. As of September 2017, more than 72% of electricity in Tuvalu was diesel generated. This heightened climate change and energy security problems and caused high per capita 3 greenhouse gas emissions.2F Tuvalu has about 16% renewable energy generation with 98% of households having access to electricity. The focus of the government is to increase the renewable energy penetration on the outer islands to 100%, to be followed by Funafuti. About 7%–10% of gross domestic product (GDP) is spent on imported fuel (depending on oil prices), making energy the costliest sector of the Tuvalu economy.

4. The vision of Tuvalu’s eighth national development plan, Te Kakeega III: National Strategy for Sustainable Development 2016–2020, foresees a more protected, secure, and prosperous Tuvalu; healthier people who are more engaged in national, regional, and international forums; and a government that encourages community input to improve project development, such that development efforts are sustained and adopted by the community.

5. Limited renewable electricity access and reliance on diesel. The state-owned Tuvalu Electricity Corporation (TEC) is tasked to provide and maintain a safe, secure, stable, financially viable, and economically sound power supply. The power systems on Tuvalu’s outer islands of Nukulaelae, Nukufetau, and Nui were transformed from diesel–powered systems offering 12–16 hours/day of power supply into hybrid solar–battery–diesel systems in 2015 offering continuous

1 Asian Development Bank (ADB). 2017. Report and Recommendation of the President to the Board of Directors: Proposed Pacific Renewable Energy Investment Facility. Manila. The facility streamlines ADB’s procedures, including single source selection of engaged consultants to prepare other ensuing projects under the facility 2 The , the Federated States of Micronesia, , the Marshall Islands, Nauru, Palau, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. 3 Government of Tuvalu. 2015. Intended Nationally Determined Contributions. Funafuti (communicated to the United Nations Framework Convention on Climate Change [UNFCCC]).

2 power supply, through funding from the European Union. The systems have been achieving 60%– 70% annual renewable energy contribution, still below the 100% government target. However, three northern islands have reached around 90% through funding from the Government of .

6. The existing power system on the main island of Funafuti in 2019 consists of three 600-kilowatt (kW) diesel generators, 735 kilowatt-peak (kWp) of solar photovoltaic generation capacity, and a further 82 kWp solar capacity that is nonoperational. The peak load observed is about 1,360 kW. The system has a fuel saver control system installed that applies an effective limit on solar output of 415 kW. The combination of this limit and inadequate redundancy in the system results in diesel generation remaining the main source of electricity production. Based on energy balance modeling, the existing system would have a renewable energy contribution of only 15% in 2020, and averages 10% over a 25-year period from 2020. The draft 4 road map developed under ADB’s technical assistance (TA)3F found that to achieve a 100% renewable contribution for Funafuti by 2025 would require 7.6 megawatts (MW) of photovoltaic capacity and 3 MW and 14 megawatt-hours (MWh) of a battery energy storage system (BESS), 5 requiring investments of more than $24 million.4F

7. Volatile revenue base and vulnerable fiscal sustainability. Tuvalu is a micro economy in the Pacific, remote from major markets with a narrow production base and with growth mainly driven by public expenditure. In the energy sector, the government intends to reduce the country’s reliance on overseas fuel markets. Tuvalu’s economic performance has picked up on the back of several large infrastructure projects and stimulus from high public expenditure. It is estimated that real GDP growth accelerated to 4.3% in 2018 (from 3.2% in 2017) and a slight fall to 4.1% is projected for 2019. The Tuvalu economy is highly vulnerable to external shocks and heavily dependent on external sources of revenue (fishing license fees and foreign aid) and imported food and fuel. The public sector dominates the economy. For 2019, the government estimates a $1.3 million negative fiscal balance versus a $14.0 million fiscal surplus in 2018 (as a result of a more than 50% increase in actual receipts of fishing license revenues). External debt is 22% as a percentage of GDP, which is within sustainable levels.

8. Vulnerability to climate change. Like many other small island developing states, especially in the Pacific, Tuvalu is highly vulnerable to external economic shocks and climate change. Climate change cuts across all 12 priority areas of Te Kakeega III, as sea-level rise poses the most significant threat to Tuvalu’s survival. Climate change and extreme weather events— such as increased temperatures; reduced solar radiation; and increased frequency and intensity of rainfall and cyclones, storm surges, and tsunamis—pose additional threats to energy infrastructure sustainability. Climate change impacts will worsen existing development challenges such as deterioration of infrastructure, water shortages, rise in noncommunicable diseases, population pressures on limited resources, and fuel and food supply disruptions.

9. Proposed solutions. The project, ADB’s first in Tuvalu’s energy sector, will help the government (i) transform the Funafuti and outer island power systems from manual, diesel-based power systems into modern, automated, power systems based on a high level of renewable energy; improve the quality, reliability, and climate resilience of service; reduce reliance on imported fuels for power generation; and reduce the cost of generation by partially replacing diesel

4 ADB. 2016. Technical Assistance for Preparing the Pacific Renewable Energy Investment Facility. Manila. 5 Tuvalu–Funafuti Roadmap to 100% Renewable Energy by 2025 (accessible from the list of linked documents in Appendix 2).

3 power with solar power. The project is expected to displace 6.7 million liters of diesel fuel and avoid 17,800 tons of carbon dioxide equivalent (CO2e) in greenhouse gas emissions over its 6 lifetime.5F

10. Alignment of development plans. Tuvalu’s 2009 National Energy Policy set a national target of 100% renewable energy for power generation by 2025. The policy is also detailed in the Enetise Tutumau 2012–2020 Master Plan for Renewable Electricity and Energy Efficiency in Tuvalu and in Te Kaniva 2012 (Climate Change Policy) and is supported by Te Kakeega III: National Strategy for Sustainable Development 2016–2020. Tuvalu’s Infrastructure Strategy and Investment Plan 2016–2025 prioritizes A$213 million of investments in maritime transportation, information and communication technology, and renewable energy.

11. The project aligns with ADB’s Strategy 2030 operational priorities of (i) addressing remaining poverty and reducing inequalities in poor island communities; (ii) accelerating progress in gender equality; and (iii) tackling climate change, building climate and disaster resilience, and 7 enhancing environmental sustainability.6F The project is in line with the objectives of ADB’s 2009 8 Energy Policy,7F and with the United Nations' Sustainable Development Goals. The project is 9 consistent with ADB’s Pacific Approach 2016–2020,8F under which ADB’s infrastructure program will harness renewable energy to drive down the cost of electricity, reduce risks, and reduce fossil fuel imports. The project is included in ADB’s country operations business plan for the 11 smallest 10 Pacific island DMCs for 2019–2021.9F

12. Processing under the Pacific Renewable Energy Investment Facility. Financing for the project will be processed under the facility. The project meets the following qualifying criteria as set out in the report and recommendation of the President for the facility (footnote 1): (i) The project scope includes renewable energy generation and support for energy sector infrastructure such as photovoltaic, BESS, and minigrid systems. (ii) Tuvalu is one of the 11 smallest Pacific island DMCs. (iii) The project is included in the Enetise Tutumau 2012–2020 and Tuvalu’s Infrastructure Strategy and Investment Plan. (iv) The project is classified category B for environment.

B. Impacts and Outcome

13. The project is aligned with the following impacts: utilization of renewable energy increased and greenhouse gas emissions in the power subsector reduced (footnote 3). The project will have the following outcome: generation and utilization of reliable and clean energy from renewable 11 energy increased.10F

C. Outputs

14. Output 1: Solar photovoltaic system installed on three outer islands. Installation of climate-resilient, ground-mounted solar photovoltaic systems on three outer islands will increase

6 Based on assumed demand growth and performance of the hybrid systems, the project will displace 317,000 liters of diesel fuel and avoid 844 tons of CO2e GHG emissions in the first full year of operations and, on average, displace 267,000 liters of diesel fuel and avoid 712 tons of CO2e GHG emissions per year over its 25-year lifetime. 7 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 8 ADB. 2009. Energy Policy. Manila. 9 ADB. 2016. Pacific Approach, 2016–2020. Manila. 10 ADB. 2018. Country Operations Business Plan: 11 Small Pacific Islands Countries, 2019–2021. Manila. 11 The design and monitoring framework is in Appendix 1. 4 the renewable energy contribution from 60-70% to more than 90%. The output includes at least 44.8 kWp of solar photovoltaic capacity for Nukulaelae, at least 78.4 kWp of solar photovoltaic capacity for Nukufetau, at least 100.8 kWp of solar photovoltaic capacity for Nui, and associated modern control systems.

15. Output 2: Solar photovoltaic and battery energy storage systems installed on Funafuti. The output will increase the renewable energy penetration in Funafuti from 15% to 32%, and includes (i) at least an additional 500 kW of rooftop solar photovoltaic capacity, (ii) at least 1 MW and 2 MWh of BESS commissioned and operational, and (iii) associated modern control systems.

16. Output 3: Institutional capacity for inclusive renewable energy project development and implementation enhanced. Consulting services support for project management and for 12 construction supervision, and comprehensive institutional capacity building, will be provided.11F

D. Summary Cost Estimates and Financing Plan

17. The project is estimated to cost $6.48 million, and the investment plan is in Table 1.

Table 1: Project Investment Plan Photovoltaic Amounta Components (kW) BESS ($ million) A. Base Costb Solar photovoltaic on outer islands 1. Nui 100.8 0.48 2. Nukufetau 78.4 0.47 3. Nukulaelae 44.8 0.57 Solar photovoltaic and BESS on Funafuti 1. Solar rooftop photovoltaic 500.0 1.06 2. BESS 1 MW/2 MWh 2.51 Institutional strengthening and consulting services support 1. Capacity building program 0.10 2. Construction supervision consultant 0.30 3. Project management support 0.18 Subtotal (A) 5.67 B. Contingenciesc 0.81 Total (A+B+C) 6.48 BESS = battery energy storage system, kW = kilowatt, MW = megawatt, MWh = megawatt-hour. a Includes taxes and duties of $0.33 million financed by the government through exemption. b In mid-2018 prices as of 12 September 2019. c Physical contingencies computed at 5.0% for the turnkey contract and consulting services. The price contingency is based on expected inflation over the implementation period. Source: Asian Development Bank estimates.

18. The government has requested a grant not exceeding $6 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The government will contribute $0.48 million, $0.33 million of which will finance duties and taxes through exemption and $0.15 million will be for contingencies. The government will make the proceeds of the grant available to the TEC under a subsidiary grant agreement upon terms and conditions satisfactory to ADB. The indicative financing plan is in Table 2.

12 All outputs incorporate gender mainstreaming and corresponding performance indicators, and targets are detailed in the design and mmonitoring framework (Appendix 1). 5

Table 2: Summary Financing Plan Amount Share of Total Source ($ million) (%) Asian Development Bank Special Funds resources (Asian Development Fund grant) 6.00 92.59 Government of Tuvalu 0.48 7.41 Total 6.48 100.00 Source: Asian Development Bank estimates.

E. Implementation Arrangements

19. The executing agency will be the Ministry of Finance (MOF). The TEC will be the implementing agency through and with oversight from the Ministry of Transport, Energy and 13 Tourism (MTET).12F A project management unit, led by a project manager, will be established at the TEC and supervised by the TEC general manager. The implementation arrangements are 14 summarized in Table 3 and described in detail in the project administration manual (PAM).13F

Table 3: Implementation Arrangements Aspects Arrangements Implementation period December 2019–June 2022 Estimated completion date June 2022 Estimated grant closing date December 2022 Management (i) Oversight body Government of Tuvalu Task Force, which comprises secretaries of all ministries (ii) Executing agency Ministry of Finance (iii) Key implementing TEC will be the implementing agency through and with oversight from agencies the Ministry of Transport, Energy and Tourism. A PMU will be established at TEC, which will be led by a project manager and supervised by the TEC general manager. (iv) Implementation unit The PMU will be supported by a team of specialized experts. Procurement ICB 1 contract $4.8 million Consulting services ICS, SSS 5 contracts (77 person-months) $0.2 million QCBS 1 contract (firm) $0.3 million Retroactive financing and/or Advance contracting will apply for procurement and consulting advance contracting contracts. Retroactive financing will not apply. Disbursement The grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, ICB = international competitive bidding, ICS = individual consultant selection, PMU = project management unit, QCBS = quality- and cost-based selection, SSS = single source selection, TEC = Tuvalu Electricity Corporation. Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical

20. Due diligence and modeling found that the optimum solution to achieve the goal of more than 90% renewable energy contribution in the three outer islands is to increase the solar photovoltaic capacity installed on each island without increasing the existing battery capacity.

13 Formerly the Ministry of Public Utilities and Infrastructure prior to reorganization in September 2019. 14 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 6

Climate-resilient designs will be used for all island systems, including raised foundations for the new powerhouse in Nukulaelae. The old powerhouse was flooded during .

21. On Funafuti, however, there is little benefit in adding further solar photovoltaic capacity to the existing power system without providing technology that can remove the solar output constraint. This is a key benefit of installing a BESS as this will remove that constraint, and in the early years will even allow short periods where the diesel generators could be turned off (zero diesel operation). With the proposed addition of 500 kW of rooftop photovoltaic capacity and a 1.0 MW, 2.0 MWh BESS, the renewable energy contribution in Funafuti is modeled to increase from 15% to 32% in 2020, and average 21% over the 25-year period from 2020. Replacement of the diesel generators will be required multiple times over the 25-year period, and the addition of a fourth and then fifth diesel generator will also be required to service forecast increases in electricity demand. By sizing the BESS larger than is currently required by the amount of solar photovoltaic capacity in the system, the power system will be set up to optimally install a further 3.2 MW of solar photovoltaic capacity. When this capacity is added to the power system, the renewable energy contribution on Funafuti is modeled to increase to 58% in the first year of installation (nominally 2023), and average 50% over the 25-year period from 2020. The addition of such solar capacity is likely to see the deferral of diesel generator replacement and reduce the need for additional diesel generators. A further stage of development in 2025 with the addition of more solar and BESS capacity would move the Fongafale power system close to achieving the goal of 100% renewable energy penetration.

22. To ensure technical and financial sustainability, the project will also incorporate lessons learnt from previous solar projects in its design and specifications, including on ensuring structural integrity and resilience of roofs and foundations, and early community engagement. 15 It will include support for consulting services for project management and for construction supervision. It will also (i) include a comprehensive and inclusive institutional capacity development program covering technical aspects (photovoltaic and BESS design, construction, testing, commissioning, operation, and maintenance), financial and economic analyses, financial management, environmental and social safeguards, gender, community engagement, procurement, tariff, and governance; and (ii) use various methods and modalities such as workshops, lectures, hands-on training, certified training, and academic degree scholarships, with special focus on gender and inclusion.

B. Economic and Financial

23. The project provides reliable and sustainable electricity supply in locations where even marginal changes in the costs of essential services have a severe impact on the viability of the affected communities. Solar power will displace diesel generation, which is difficult to maintain and operate sustainably, emits greenhouse gases, and is subject to wide price swings from overseas markets. Capital costs of the project include the base cost, covering civil and electrical works, equipment, logistics, and transport and physical contingencies. Cost of asset replacements for inverters, BESS cells, photovoltaic arrays, and backup diesel generators were included. The Funafuti BESS accounts for a large portion of the cost ($2.3 million, excluding contingencies) and by itself does not produce energy, but rather enables renewable energy to be utilized. The BESS

15 This includes projects funded by the European Union, Japan, the United Arab Emirates and the World Bank. Cyclones, storm surges and rising sea levels caused leaks on rooftops with solar panels and flooded powerhouses. Also, in land-constrained Tuvalu, social safeguards issues caused delays in processing and implementation. Early and constant consultation with the community and landowners ensured acceptance and timely project processing.

7 can support a further 3.2 MW of solar photovoltaic capacity and for the purpose of the project financial and economic analyses it is assumed that the renewable energy connectivity potential of the BESS is fully utilized.16 The diesel savings have been priced using the average fuel price at the TEC and projected in step with the World Bank Commodity Price Forecast for crude oil in 17 constant prices.14F The economic analysis adopted a cost–benefit analysis for the four subprojects 18 19 combined15F and following ADB’s Guidelines for the Economic Analysis of Projects.16F The guidelines specify the greenhouse gas emission value as $36.3 per ton of CO2e in 2016 prices, increasing by 2% in real terms annually (i.e., equivalent to $38.54 per ton in 2019, and increasing by 2% every year thereafter). Under the above estimated costs, system performance, and quantified benefits, the economic internal rate of return of the combined project is 9%, which is 20 above the 6% threshold,17F and is robust to reasonable adverse variations in the key cost and benefit parameters. Financial analysis was conducted following ADB’s Financial Management 21 and Analysis of Projects guidelines.18F The project has a positive financial internal rate of return of 6.9% but is below the 7.1% weighted average cost of capital. However, each year the project’s fuel cost saving benefits outweigh the incremental operation and maintenance costs and, therefore, the project is financially sustainable.

24. A financial performance analysis of the TEC was conducted, and it was determined that the tariff has remained unchanged for several years and that TEC faces a severe cash flow crisis with mounting arrears from customers. The government agrees to (i) make continuous efforts to increase tariffs progressively to achieve full cost recovery and in accordance with national tariff policies and regulations; (ii) undertake a periodic gender-sensitive review of tariffs and fees, including an assessment of their impact on low-income households; and (iii) initiate an implementation plan to achieve inclusive, gender-responsive, cost-recovery tariffs.

C. Governance

22 25. A financial management assessment was conducted for the TEC.19F Country-level risks have been assessed moderate and relate to those associated with a very small economy and government, such as recruiting and retaining qualified and experienced staff, and segregation of duties to facilitate effective internal control. Entity-specific risk is assessed high because the TEC has no previous experience with ADB, and project-specific risks are assessed low because it is a turnkey project. The integrity due diligence conducted on the TEC assessed it as low risk. The overall inherent risk rating is moderate. The overall control risk has been assessed moderate although, in the following areas, the control risk is assessed high because of (i) lack of an internal audit function at the TEC, and (ii) incorrect adoption of International Financial Reporting Standards in relation to accounting for government grants and impairment of assets. The project will address these high-risk areas as follows: (i) the government agreeing to prioritize the preparation and implementation of an internal audit program for the TEC through the utilization of the central internal audit unit, and (ii) the TEC initiating the process of restating its financial statements with the agreement of its external auditor. Although TEC staff are not familiar with

16 Government has sought and ADB is exploring financing for this additional solar capacity by 2023. Cofinancing from the Global Environment Facility and the Government of are being considered. 17 World Bank Commodity Price Forecast, 29, October 2018. 18 The combined approach is justified since benefits are for the entire country to help achieve the 100% national target. 19 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. https://www.adb.org/sites/default/files/ institutional-document/32256/economic-analysis-projects.pdf 20 The social discount rate of 6.0% is justified since the project serves remote communities on poor, remote islands; 26.3% of the population lives below the poverty line; and 46.7% of the population lives on $5.50 or less per capita per day. 21 ADB. 2005. Financial Management and Analysis of Projects. Manila. 22 Financial Management Assessment (accessible from the list of linked documents in Appendix 2). 8

ADB accounting and disbursement procedures, the government agrees to use in-country experience through the Outer Island Maritime Infrastructure Project (funded by ADB and the World Bank) project management unit and the ADB-assisted Central Procurement Unit of the MOF. Detailed internal control and risk assessments and the financial management action plan have been prepared and are detailed in the PAM (footnote 14).

26. Procurement capacity. ADB completed a project procurement risk assessment, noting that the TEC will require external support to mitigate the procurement-related risks to the project (PAM, section VI). Through support by the already engaged TA consultant (footnote 4), direct ADB assistance to consultant recruitment (via joint recruitment) and the engagement of additional consultants (individuals and firm) at the implementation stage, procurement risk related to the project is substantially mitigated. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, the MOF, MTET, and TEC. The PAM describes specific policy requirements and supplementary measures (footnote 14).

D. Poverty, Social, and Gender

27. The project will add additional small-scale solar photovoltaic and battery infrastructure that will increase renewable energy contribution and displace more diesel fuel and, as a result, help to reduce and stabilize generation costs. The gender-sensitive tariff review being conducted under ADB’s TA has a two-pronged objective of ensuring full cost recovery of TEC operations with provisions for asset replacement and arriving at a more equitable subsidy distribution which will benefit low-income consumers, including vulnerable groups. A more sustainable and equitable power supply will not only benefit the entire population but will also contribute to narrowing the gap between poor people and the rest of the population. Women will be among the key beneficiaries as they are the main energy consumers at the household level through cooking and cleaning activities. They can also maximize power use for productive income-generating activities through the use of skills gained from the project’s capacity building events.

28. The project is categorized as effective gender mainstreaming. A gender action plan has 23 been prepared.20F Design features and targets include (i) arranging stakeholder consultations to achieve 50% participation of women overall; (ii) if local workers are hired, having a target of at least 25% female local workers overall for construction, administration, maintenance, security, and supervision; (iii) developing and implementing formal TEC human resource gender policies, including equal pay for equal work between men and women by the end of 2020; (iv) funding and awarding in 2020 two academic and/or training scholarships of up to 2 years each for two Tuvalu women and then hiring them on graduation to technical positions in the TEC; (v) developing a household electricity demand management public awareness program; (vi) training women and men on business skills and carrying out the program nationally, beginning in Funafuti, with presenters, 50% of whom are female, trained to present courses to outer islands; (vii) ensuring a gender-sensitive tariff review of residential accounts with analysis and recommendations on subsidies and tariffs to support low-income households, including households headed by women; and (viii) initiating the implementation plan of the inclusive, gender-responsive, cost-recovery tariff review recommendations.

E. Safeguards

29. Environment. The project has been screened and categorized B for environment because the impacts will largely be site specific, with a small footprint generated during the

23 Gender Action Plan (accessible from the list of linked documents in Appendix 2) 9 construction stage and for which mitigation measures can be readily designed and implemented. The environmental assessment has been prepared in accordance with ADB’s Safeguard Policy Statement (2009) and will be updated, following detailed design, to also comply with the laws and regulations of Tuvalu. The potential impacts include earthworks and site preparations, limited vegetation removal, dust and noise generation, import and haulage of equipment and materials, presence of foreign workers, and health and safety risks. To manage and mitigate impacts during operation, the TEC will implement measures identified in the environmental management plan covering correct disposal of used equipment such as batteries and inverters. Adequate mitigation measures have been incorporated into the environmental management plan. The climate change 24 assessment conducted will inform the design and technical specifications.21F

30. Involuntary resettlement and indigenous peoples. The project is classified category C for involuntary resettlement, with no land acquisition required. Project impacts will also not cause any physical or economic displacement. For subprojects in the outer islands, the sites in Nukulaelae and Nukufetau will utilize land under an existing lease with the TEC, with the site in Nui requiring an extension of the site under an existing lease agreement and an amendment of the lease with the local town council to include some near-shore tidal flat area. On Funafuti, the project will install additional solar photovoltaic equipment on government building rooftops and install BESS capacity in the existing TEC compound, both subject to an agreed memorandum of understanding between the Funafuti Native Lands Trust Board and the government. A due diligence report has been prepared and will be updated after detailed design and before award of 25 the turnkey contract.22F The project is classified category C for indigenous peoples according to ADB’s Safeguard Policy Statement. No distinct and vulnerable indigenous peoples will be affected, and all project activities will be implemented in a culturally appropriate and participatory manner.

F. Summary of Risk Assessment and Risk Management Plan

31. No significant issues are expected to arise in implementing the project. Key risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment 26 and risk management plan.23F

Table 4: Summary of Risks and Mitigating Measures Risk Mitigation Measures Project implementation capacity ADB, the PMU, and the construction supervision consultant Insufficient institutional, procurement, will assist the TEC, MTET, and MOF in project and technical capacity and experience implementation execution, monitoring, and procurement. in implementing investment projects Institutional capacity building will be provided. Market sounding will be conducted to gauge and widen market interest before tendering. Governance ADB will strengthen oversight during the project, which will Weak financial management capacity, include holding biweekly teleconferences and two review lack of internal audit function within missions per year. TEC, and potential misuse of funds An internal audit program for the TEC will be applied through the utilization of the central internal audit unit and with TEC initiating the process of restating its financial statements with the agreement of its external auditor. Utility and asset sustainability The Government of Tuvalu through the MOF will undertake a Current tariff structure does not provide review of the tariff structure and implement a plan to

24 Climate Change Assessment (accessible from the list of linked documents in Appendix 2). 25 Social Safeguards Due Diligence Report (accessible from the list of linked documents in Appendix 2). 26 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2). 10

Risk Mitigation Measures cost recovery for TEC and requires the progressively increase tariffs towards full cost recovery. Tariff executing agency or external parties to revision is covenanted. provide funding for TEC to remain liquid. Lack of funds and capacity for routine The government will ensure minimum tariff levels to ensure maintenance and quick recovery against coverage of basic operation and maintenance costs, debt disaster service, and capital replacement. The TEC will implement the operation and maintenance plan. Comprehensive institutional capacity building will be provided. The TEC (in coordination with the MOF) will set up a self- insurance fund. The MOF will ensure that the fund is financed such that funds are available when needed (rather than it being a pure bookkeeping exercise). Unrealized project financial and The government is actively seeking financing from ADB and economic benefits other donors such as the Global Environment Facility for Because of lack of or delayed additional additional solar installation on Funafuti. ADB and the Global investments in solar capacity to fully Environment Facility are coordinating on additional financing utilize the battery capacity by 2022. ADB = Asian Development Bank, MOF = Ministry of Finance, MTET = Ministry of Transport, Energy and Tourism, PMU = project management unit, TEC = Tuvalu Electricity Corporation. Sources: Government of Tuvalu and Asian Development Bank.

IV. ASSURANCES

32. The government, the MOF, MTET, and TEC have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and grant documents.

33. The government, the MOF, MTET, and TEC have agreed with ADB on certain covenants for the project, which are set forth in the grant and project agreements. The government has agreed with ADB on the following condition for disbursement: no withdrawals shall be made from the grant account until the subsidiary grant agreement, in form and substance satisfactory to ADB, shall have been duly executed and delivered on behalf of the government and the TEC, and shall have become legally binding upon the government and the TEC, in accordance with its terms.

V. THE PRESIDENT’S DECISION

34. The President, acting under the authority delegated by the Board through the approval of the Pacific Renewable Energy Investment Facility, has approved the grant not exceeding $6,000,000 to Tuvalu for the Increasing Access to Renewable Energy Project, from ADB’s Special Funds resources (Asian Development Fund), on terms and conditions as are substantially in accordance with those set forth in the draft grant and project agreements.

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impacts the Project is Aligned with Utilization of renewable energy increased and greenhouse gas emissions in the power subsector reduced (Intended Nationally Determined Contributions, 2015)a

Data Sources and Performance Indicators with Reporting Results Chain Targets and Baselinesa Mechanisms Risks Outcome By 2022: Generation and utilization of a. Increase renewable a.–d. MOF, Reduction in diesel reliable and clean energy electricity generation in Tuvalu MTET annual use by power from renewable energy to 35% of generation mix (2019 reports, TEC subsector is offset increased baseline: 16%) generation by increase in other b. Increase generation of solar data, and sectors. photovoltaic power by 1,280 project MWh per year (2019 baseline: completion 0 MWh) report c. Diesel fuel savings of at least 317,000 liters per year generated in the first year (2019 baseline: 0) d. Carbon dioxide emissions avoidance of 844 tons per year in the first year (2019 baseline: 0) Outputs By 2022: 1. Solar photovoltaic 1a. At least 44.8 kWp solar 1a.–e. MTET Bidding packages system installed on three photovoltaic capacity for and TEC are unattractive and outer islands Nukulaelae annual do not receive 1b. At least 78.4 kWp solar reports, sufficient photovoltaic capacity for project competitive tender Nukufetau progress offers. 1c. At least 100.8 kWp solar reports photovoltaic capacity for Nui Counterpart support, 1d. Hire at least 25% women 1d.–f. GAP performance, and among any local workers hired, progress coordination are for construction, administration, report weak and maintenance, security, and inadequate. supervision roles (baseline: 0) 1e. Public awareness program There are on efficient household implementation electricity demand delays because of management; and business bad weather and skills training on income unavailability of opportunities from electricity transport to the supply for women and men outer islands. developed and potential trainers with at least 50% women trained (baseline: 0) 1f. At least two electricity demand management public awareness programs implemented with at least 50% participation of women (baseline 0) and separate business skills trainings for

12 Appendix 1

Data Sources and Performance Indicators with Reporting Results Chain Targets and Baselinesa Mechanisms Risks men and women (20 women and 10 men). 2. Solar photovoltaic By 2022: system and BESS installed 2a. At least an additional 500 2a.–d. MTET Bidding packages on Funafuti kilowatts photovoltaic capacity and TEC are unattractive and commissioned and operational annual do not receive 2b. At least 1 megawatt /2 reports, sufficient MWh BESS commissioned and project competitive tender operational progress offers. 2c. Hire at least 25% women reports among any local workers hired, TEC are staff not for construction, administration, 2c.–e. GAP prepared to operate maintenance, security, and progress a modernized power supervision roles (baseline: 0) report station incorporating 2d. Public awareness program automated controls, on efficient household BESS technology, electricity demand and solar management; and business photovoltaic skills training on income capacity. opportunities from electricity supply for women and men developed and potential trainers with at least 50% women trained (baseline: 0) 2e. At least two electricity demand management public awareness programs implemented with at least 50% participation of women (baseline 0) and separate business skills trainings for men and women (30 women and 20 men) 3. Institutional capacity for By 2022: inclusive renewable energy 3a. At least two women 3a.–e. MTET There is insufficient project development and provided scholarships on solar- and TEC interest in training implementation enhanced and battery-related technical annual and programs courses and subsequently reports, offered. employed at TEC (baseline: 0) project 3b. TEC percentage of women progress staff increased to 30% reports, GAP (baseline: 10%, i.e., five out of progress 50 are women) report 3c. Construction supervision consultant with at least 30% women team members mobilized (i.e., two out of six consultants) 3d. At least 30 stakeholders, including nine women, participate in a national workshop including hands-on training on photovoltaic and Appendix 1 13

Data Sources and Performance Indicators with Reporting Results Chain Targets and Baselinesa Mechanisms Risks BESS technology and related operation and maintenance (baseline: 0) 3e. Gender policy for human resource management for TEC developed (baseline: 0) Key Activities with Milestones 1. Solar photovoltaic system installed on three outer islands 1.1 Procure EPC contractor (Q4 2019–Q1 2020). 1.2 Award and mobilize EPC contract (Q1 2020). 1.3 Contractor procures solar photovoltaic and auxiliary systems (Q2 2020). 1.4 Contractor installs solar photovoltaic and auxiliary systems (Q3 2020–Q4 2020). 1.5 Contractor operates, maintains, and hands over solar photovoltaic and monitoring systems (Q4 2020–Q1 2022).

2. Solar photovoltaic and battery energy storage systems installed on Funafuti 2.1 Procure EPC contractor (Q4 2019–Q1 2020). 2.2 Award and mobilize EPC contract (Q1 2020). 2.3 Contractor procures solar photovoltaic, BESS, and auxiliary systems (Q2 2020). 2.4 Contractor installs solar photovoltaic, BESS, and auxiliary systems (Q3 2020–Q4 2020). 2.5 Contractor operates, maintains, and hands over solar photovoltaic, BESS, and monitoring systems (Q4 2020–Q2 2022).

3. Institutional capacity for inclusive renewable energy project development and implementation enhanced 3.1 Establish project management unit (Q4 2019). 3.2 Engage project implementation consultant (Q4 2019). 3.3 Project implementation consultant develops capacity building program, including design of an education and awareness campaign (Q1 2020). 3.4 Project implementation consultant organizes and conducts training and education and awareness campaign (Q1 2020–Q2 2022). 3.5 EPC contractor organizes and conducts hands-on training in solar photovoltaic and BESS design, construction, operation, and maintenance (Q1 2020–Q2 2022). Project Management Activities Monitor and evaluate capacity building events (Q1 2020–Q2 2022). Inputs Asian Development Bank: $6.00 million (Asian Development Fund) Government of Tuvalu: $0.48 million BESS = battery energy storage system; EPC = engineering, procurement, and construction; GAP = gender action plan; kWp = kilowatt peak; MOF = Ministry of Finance; MTET = Ministry of Transport, Energy and Tourism; MWh = megawatt- hour; Q = quarter; TEC = Tuvalu Electricity Corporation. a Government of Tuvalu. 2015. Tuvalu Intended Nationally Determined Contribution. Funafuti (communicated to the United Nations Framework Convention on Climate Change [UNFCCC]). Contribution to the Asian Development Bank Results Framework: To be determined. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=49450-015-2

1. Grant Agreement: Special Operations 2. Project Agreement 3. Sector Assessment (Summary): Energy 4. Project Administration Manual 5. Financial Analysis 6. Economic Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Risk Assessment and Risk Management Plan 10. Climate Change Assessment 11. Gender Action Plan 12. Initial Environmental Examination

Supplementary Documents

13. Social Safeguards Due Diligence Report 14. Financial Management Assessment 15. Stakeholder Communication and Participation Plan 16. Tuvalu–Funafuti Road Map to 100% Renewable Energy by 2025